Federal Reserve Officials at Odds on Jobs Outlook

The U.S. economy will likely grow at a moderate pace, inflation will stay low, and unemployment will fall, three top U.S. Federal Reserve officials on Thursday said in remarks prepared for delivery to an economic outlook summit.

But their conflicting views on the workings of the labor market suggested they will continue to spar on policy, as the U.S. central bank decides the path of interest rates that have been held near zero for more than three years.

Two of the Fed's more dovish policymakers - San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart - blamed high employment on sluggish demand and far-from-blistering economic growth. If joblessness stems from low growth, the reasoning goes, continued easy monetary policy can help boost employment.

With inflation well controlled, Williams said: "It's essential that we keep strong monetary stimulus in place for quite some time."

Lockhart likewise blamed the "relatively modest economic expansion" for restrained job growth, suggesting he is also supportive of keeping the monetary gas pedal to the floor.

Philadelphia Fed President Charles Plosser, a policy-maker known for his hawkish bent who took the podium second as Williams and Lockhart watched intently from chairs on the stage, had a slightly more optimistic view of growth. He projected 3 percent GDP expansion this year and next, which could push inflation slightly above the Fed's 2 percent target.

While he did not offer an extensive analysis of the drivers of unemployment like his two colleagues, Plosser argued the labor market is shaped by "a huge number" of factors beyond the central bank's control, including technological innovations and tax policy.

"It is not appropriate for the Fed to establish a numerical objective for the maximum employment part of its mandate," he said. "This is not because the employment part of the mandate is less important, but because the economic determinants of employment are different from those of inflation."

Plosser earlier this week said the Fed may need to raise interest rates as soon as late this year, although he did not repeat that view in his prepared remarks Thursday.

The Fed in late 2008 slashed interest rates to near zero and has since bought $2.3 trillion in long-term securities in an unprecedented drive to spur growth and revive the economy after the worst recession in decades.

Yet the recovery, especially in jobs, has been slow and economic growth has been erratic, leading the central bank to say it expects to keep rates "exceptionally low" at least through late 2014.

The Fed has kept the door open to more asset purchases but doesn't want inflation, now near its 2-percent target, to rise much more.

A government report on Friday is expected to show that unemployment stood at 8.2 percent in April, around where it has been for the last two months. Inflation has stayed near the Fed's 2 percent target for the past five years.

Plosser noted that only four of his fellow policymakers now believe the Fed should first hike rates after 2014, versus six in January. He said such changes in the central bank's statement of economic projections, or SEP, are important clues to future policy.

"It is possible that the maximum employment and price stability parts of the Fed's mandate could be in conflict," he said in remarks prepared for delivery. "I suggest that the public watch the assessments of the appropriate policy as viewed by policymakers in the SEP as an important source of information in this regard."

Both Williams and Lockhart have votes this year on the Fed's policy-setting panel. Plosser does not.

Williams took aim at the notion, embraced by some of his fellow Fed policymakers, that structural factors including mismatch between the skills employers seek and those that workers have are central to the high unemployment rate.

Empirical studies, Williams said, show that's not the case, with structural factors contributing only "a bit" to the current jobless rate.

The natural rate of unemployment - the point at which undesirable inflation pressures start to build - has likely risen to about 6 percent to 6.5 percent in the recent recession, he said. That means the unemployment rate has about 2 percentage points to fall before inflation could kick in, he said.

Notably, not even the doves on the panel argued for the Fed to do more at this point. Lockhart suggested the debate over the workings of the labor market will inform that decision going forward.

"Whether additional monetary policy actions should be used at this time to try to speed things up has to be balanced against the risks to the Fed's price stability objective that could accompany an overestimating of the amount of economic slack - particularly labor market slack," Lockhart said.

"There are risks, of course, but I believe the threats to price stability are reasonably contained at present," he said.